How to interest rate swaps work
What is an interest rate swap? An interest rate swap is a contract between two parties to exchange interest payments. Each is calculated on the same principal amount (referred to as "notional amount") on a recurring schedule over a set period of time. One party typically pays a fixed interest rate, while the other party typically pays a floating interest rate. No principal (notional) amount is exchanged. The parties simply exchange, or swap, interest payments.